How To Prepare For The Great Tax Snapback Of 2022

Imagine an office or multifamily building where elevator maintenance is neglected, and the owner doesn’t reach for the phone until the problem is so bad that tenants are stranded on various floors. 

In this situation, a building would have trouble attracting and maintaining occupants in today’s competitive commercial real estate environment.

As a result, most responsible building owners regularly have their elevators maintained, plumbing checked and wiring examined. So why is it that some of these same building owners neglect another important consideration — tax assessments — even though it could cost them millions of dollars if they are not vigilant?

“I tell clients they should treat their property tax management process just like they would an elevator maintenance contract,” said Shane Moncrief, a principal and commercial property tax practice leader with tax advisory firm Ryan LLC. “Because if you wait for it to break, it's going to be detrimental to you.” 

If there has ever been a time when CRE owners need to be on top of their property taxes, it is now. Moncrief said that assessments were reduced across the country by local assessors or through the appeals process, particularly on hospitality properties that were hit hard when travel was greatly curtailed during the coronavirus pandemic. 

However, what goes down can also go back up, as the table below suggests.

“If the economy bounces back, you cannot budget on that same 25% to 30% reduction,” he cautioned. “When you get to 2022, you’ve got to be ready for a snapback in the assessed value as well.”

That is liable to catch some CRE owners by surprise, especially after a year during which tax recovery opportunities were bountiful. 

“Finding recovery opportunities this year has still been pretty strong,” Moncrief said. “Our firm is the largest property tax consulting firm in the U.S., and we filed a record number of appeals this year.”

Next year is likely to be very different as tax assessors, who typically lag the market, try to capture the economic rebound many businesses experienced this year. This means property owners, who have the best understanding of what is really happening in their markets, need to take a hard look at ongoing trends that could impact their properties.

Their office tenants, for example, might be re-evaluating whether they need so much space, while retailers are downsizing their brick-and-mortar properties as e-commerce continues to gain in popularity. These trends could leave commercial property owners with a significant amount of empty space that creates a drag on their bottom lines.  

“If you're facing significant tenant rollover as you get into the end of 2021 or if you expect significant rollover in 2022 you need to be talking about that now,” Moncrief said. 

As an example, he said, if you know you are likely to lose a major tenant in the coming months, the time to bring this red flag to your tax adviser’s attention is now. Again, it is a matter of treating it like you would treat routine maintenance of a building’s infrastructure.

“Don’t take the attitude of ‘hey, I’ll call you after it’s broken, after my big tenant has moved out,’” he said. “Because the problem with property taxes is that if you miss an appeal deadline, then you have missed the opportunity to file your tax protest for a whole year. There are very few places where there's a second opportunity to save the day.”

These are things to keep in mind in mergers and acquisitions as well, which Moncrief said have picked up greatly in recent months. A potential acquisition might look great on paper, but are you really purchasing a building that is losing revenue as tenants continue to downsize?

“The biggest advice I'm giving clients is that you’ve got to look carefully at every transaction,” he said. “And now that you own it, you’ve got to be ready for next year.”

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This article was produced in collaboration between Studio B and Ryan LLC. Bisnow news staff was not involved in the production of this content.

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